Bank Debt Regulations Implications for Bank Capital and Bond Risk
We use a structural model of default risk to study how optimal bank capital and bond risk are influenced by deposit insurance, implicit guarantees, depositor preference, asset encumbrance, and bail-in resolution frameworks. We find that these features of bank financing, in addition to having an immediate impact on bond debt risk, also change optimal bank capital, countering the first-order effect on bond debt risk. Bondholders' risk is thereby not materially affected, but shareholder value and public sector value are. A gap between optimal capital and required capital represents a cost to shareholders, and increases the risk of regulatory arbitrage. Enhancing capital requirements, and at the same time adopting bank debt regulations that reduce the optimal capital, is to gain some and lose some in terms of financial stability. Based on a small sample of European banks, we find support for the central model predictions.
|Date of creation:||13 Jun 2013|
|Date of revision:|
|Contact details of provider:|| Postal: 7491 Trondheim|
Phone: 73 59 19 40
Fax: 73 59 69 54
Web page: http://www.svt.ntnu.no/iso/WP/wp.htm
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Douglas W. Diamond & Raghuram G. Rajan, 2000.
"A Theory of Bank Capital,"
Journal of Finance,
American Finance Association, vol. 55(6), pages 2431-2465, December.
- Douglas W. Diamond & Raghuram G. Rajan, . "A Theory of Bank Capital," CRSP working papers 363, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Douglas W. Diamond & Raghuram G. Rajan, 1999. "A Theory of Bank Capital," NBER Working Papers 7431, National Bureau of Economic Research, Inc.
- Flannery, Mark J, 1994.
"Debt Maturity and the Deadweight Cost of Leverage: Optimally Financing Banking Firms,"
American Economic Review,
American Economic Association, vol. 84(1), pages 320-31, March.
- Mark J. Flannery, 1991. "Debt maturity and the deadweight cost of leverage: optimally financing banking firms," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
- Stewart C. Myers & Raghuram G. Rajan, 1995.
"The Paradox of Liquidity,"
NBER Working Papers
5143, National Bureau of Economic Research, Inc.
- Raghuram G. Rajan & Luigi Zingales, 1994.
"What Do We Know About Capital Structure? Some Evidence from International Data,"
NBER Working Papers
4875, National Bureau of Economic Research, Inc.
- Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-60, December.
- Koziol, Christian & Lawrenz, Jochen, 2009. "What makes a bank risky? Insights from the optimal capital structure of banks," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 861-873, May.
- Mark J. Flannery, 2012. "Corporate Finance and Financial Institutions," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 233-253, October.
- Demirguc-Kunt, Asli & Karacaovali, Baybars & Laeven, Luc, 2005. "Deposit insurance around the world : a comprehensive database," Policy Research Working Paper Series 3628, The World Bank.
- Sebastian Schich & Byoung-Hwan Kim, 2012. "Developments in the value of implicit guarantees for bank debt: The role of resolution regimes and practices," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2012(2), pages 35-65.
- Allen Berger & Robert DeYoung & Mark Flannery & David Lee & Özde Öztekin, 2008.
"How Do Large Banking Organizations Manage Their Capital Ratios?,"
Journal of Financial Services Research,
Springer;Western Finance Association, vol. 34(2), pages 123-149, December.
- Allen N. Berger & Robert DeYoung & Mark J. Flannery & David Lee & Ozde Oztekin, 2008. "How do large banking organizations manage their capital ratio?," Research Working Paper RWP 08-01, Federal Reserve Bank of Kansas City.
- John P. Harding & Xiaozhing Liang & Stephen L. Ross, 2007. "The Optimal Capital Structure of Banks: Balancing Deposit Insurance, Capital Requirements and Tax-Advantaged Debt," Working papers 2007-29, University of Connecticut, Department of Economics, revised Feb 2008.
- Hayne E. Leland and Klaus Bjerre Toft., 1995.
"Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads,"
Research Program in Finance Working Papers
RPF-259, University of California at Berkeley.
- Leland, Hayne E & Toft, Klaus Bjerre, 1996. " Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Journal of Finance, American Finance Association, vol. 51(3), pages 987-1019, July.
- Hilscher, Jens & Raviv, Alon, 2014.
"Bank stability and market discipline: The effect of contingent capital on risk taking and default probability,"
Journal of Corporate Finance,
Elsevier, vol. 29(C), pages 542-560.
- Jens Hilscher & Alon Raviv, 2012. "Bank stability and market discipline: The effect of contingent capital on risk taking and default probability," Working Papers 53, Brandeis University, Department of Economics and International Businesss School, revised Jan 2014.
- Reint Gropp & Florian Heider, 2010.
"The Determinants of Bank Capital Structure,"
Review of Finance,
European Finance Association, vol. 14(4), pages 587-622.
- James, Christopher, 1991. " The Losses Realized in Bank Failures," Journal of Finance, American Finance Association, vol. 46(4), pages 1223-42, September.
When requesting a correction, please mention this item's handle: RePEc:nst:samfok:14813. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Hilde Saxi Gildberg)
If references are entirely missing, you can add them using this form.